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DO YOU KNOW?

1. What is globalization? Why is globalization important evento firms that do not have any international involvement atpresent? How does globalization affect the consumer? Theemployee?

2. What are the benefits of globalization, and what are itsthreats, both real and perceived?

3. What do the terms international business, internationaltransaction, international trade, and international investmentmean? Can you distinguish between the multinationalenterprise (MNE) and the international firm?

4. What are the differences between international businessand domestic business? What is the source of thesedifferences?

5. Why do firms expand globally? What do they hope to gain,and what hazards do they face? Does every firm seek identicalgoals or face the same obstacles and opportunities whenexpanding into international markets?

OPENING CASE

The Coca-Cola Company

A tlanta-based Coca-Cola Company, a manufacturer,distributor, and marketer of nonalcoholic beverages,is one of the first examples that come to mind

when people think of a global company. With almost 400

beverage brands, and sales in more than 200 countries, fewother companies can match Coca-Cola’s worldwide presenceor the visibility of its products, particularly its flagship, Coke,which has become the symbol of a global product. Studiesshow that the brand enjoys the highest name recognition inthe world. The Coca-Cola Company ranked 89th on theFortune 500 list for 2006 (up three slots from 2005), withroughly 23 billion U.S. dollars in revenue and 5 billion inprofit. The company, which first sold trademark registeredCoke in the United States in 1886, relied on internationalmarkets for 73% of its gallon volume in 2005. At 29.4% ofthe total, net operating revenue was highest for theEuropean Union in the same year, followed by NorthAmerica with 28.4%, and 19.5% for North Asia, Eurasia,and the Middle East (combined).

Coca-Cola normally sells concentrate to local bottlers thatprepare the beverage and distribute it in their respectivemarkets, but in some countries it does not grant bottlers fullmanufacturing rights. Unlike its domestic contracts, itsinternational agreements are limited in time, allowing fortermination at the company’s discretion, and marketingsupport, while common, is not provided in all markets. True tothe now famous slogan “Think globally, act locally,” thecompany also preserves a coherent marketing theme yet adaptsproduct taste as well as operations to local markets. The “Thinkglobally act locally” slogan embodies what may be the centraldilemma in international business: the need to maintain globalstrategic focus and leverage scale advantages, while allowingfor adaptation to local circumstances in everything fromproduct specifications to packaging and distribution. Thecompany’s most global function—advertising—avoids themesthat would be controversial in local markets. This is in contrast

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to its rival Pepsi, which, for example, irked religious circles inIsrael with ads showing monkeys as human ancestors.

Coca-Cola’s global success has ruffled some feathers. Afew years ago, the European Commission rejected its bid toacquire a French beverage maker, pointing out that italready had a majority share in the EU markets. Thecompany’s argument that it merely had a tiny share of themarket—defined as all liquids consumed, including water—fell on deaf ears. Efforts to promote a global image did notprevent the company from being identified and labeled an

American icon, making it a lightning rod for criticism andattacks by anti-U.S. and antiglobalization activists. In 2001,Coca-Coca’s facilities were bombed by Moslem rebels inIndia and by Maoist guerrillas in Nepal. Since that time,Coca-Cola has been the target of protests against U.S.policies in Serbia, Europe, and the Arab world, amongothers.

SOURCES: Coca-Cola Annual Report 2006; Fortune 500 annual list,2006; media reports.

2 INTERNATIONAL BUSINESS

Globalization has become one of the buzz-words of modern times. People see its manifes-

tations all around them, from the Coke can in a small village store in Africa toMcDonald’s golden arches in a Chinese city; from an article in the local news-paper about the outsourcing of software maintenance to India to the shift ofa call center to Canada. Opinions regarding the impact of globalization varywidely, ranging from praise for its association with rising living standards tocondemnation of its ill effects, such as industrial pollution. On the eveningnews you may hear praise for globalization from a farmer who has just con-cluded a contract for a large shipment of soybeans to China, only to see it fol-lowed by coverage of an antiglobalization demonstration outside a tradeconference. So what is globalization, and why does it generate such diverse andoften emotional reactions?

In line with the diversity of opinion, globalization has been definedin numerous ways. In this book, we define globalization as the acceleration andextension of interdependence of economic and business activities acrossnational boundaries. Simply put, this means that a development on one side ofthe globe will have consequences on the other. It is easy to see the impact withina particular industry—for instance, automotive. U.S.-based makers of auto parts,such as Delphi and Visteon, have been pushed to restructure by pressure fromlow-cost producers in Asia, Mexico, and Eastern Europe who can make the sameautomotive component for less. Volkswagen has demanded concessions from itsGerman workforce as a condition for keeping production locally. Closer tohome, the price you pay at the pump is partially determined by energy demandin other countries, with soaring consumption in China and India accounting formuch of the doubling of oil prices between 2004 and 2006. This interdepen-dence will not go away. The United States National Intelligence Council noticesin its 2020 Project Report that “certain aspects of globalization, such asthe growing global connectedness, are not likely to go away,” and that this willhave far-reaching consequences for the expansion of international business:“Interdependence has widened the reach of multinational business, enablingsmaller firms as well as large multinationals to market across borders and bring-ing heretofore non-traded services into the international arena.”1

What Does Globalization Mean to You?

To the consumer, globalization means more choices, generally lower prices (butnot always, as the example of gas prices shows), and an increasingly blurrednational identity for products and services. Send a package from New York toChicago via DHL, and you have contributed to the revenue of the German

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Postal Service. Buy a Swedish-made Saab, and you have increased the revenue ofits U.S. owner, General Motors (GM). Buy a Jaguar, and you have contributed tothe bottom line of the Ford Motor Company. Buy a Dodge, and you have pur-chased a product of German-based DaimlerChrysler, the product of a mergerbetween German firm Daimler and U.S.-based Chrysler that is now beingundone. Buy a foreign brand, and you may find out that it is manufactured inthe United States—Honda Civics in Ohio, Mercedes M Class in Alabama, Nissanpickup trucks in Tennessee. If you prefer to buy Canadian, you can choosebetween a GM or a Ford vehicle manufactured in Canada; or you can settle forthe Mercedes M class, made in the United States but advertised in Canada as“made by a Canadian”—alluding to the manager of a U.S. plant. If you are anAustralian consumer who wants to buy a locally produced vehicle, you canselect between three locally produced foreign brands: Holden (a GM brandwhose design is influenced by its German subsidiary Opel), Ford, or Toyota.These Australian operations also export to other countries while facing morecompetition from imports as local tariffs are reduced.

Similar trends can be observed in the service sector. The mortgage on yourU.S. property might be underwritten by Dutch bank ABN Amro; your life insur-ance by French insurer AXA. Your retirement funds might be invested in thestock of Swiss food giant Nestlé and Japanese electronics maker Sony (currentlyled by a U.S. executive) or managed by German-based Deutsche Bank. Theadvertisement enticing you to buy Cincinnati-based P&G’s Pampers may havebeen conceived by the U.K.’s Saatchi & Saatchi, but the graphic work may havebeen done in India. If you buy at your local Wal-Mart, chances are that many ofthe products on the shelves are made outside the country; Wal-Mart importsfrom China, for instance, exceed those of the United Kingdom. Even the studentsitting next to you may well be a foreign national, as might be the patient wait-ing next to you in the hospital clinic. You may take your next vacation inMexico rather than in Florida—just remember to take your Chinese manufac-tured iPod along for the ride.

In addition to offering a dizzying array of consumer products and services,globalization affects your career prospects. At times, it will also limit your oppor-tunities, as when the transcription of medical records is outsourced to India; atother times, especially if you are better educated, globalization will greatlyexpand your career choices and opportunities. It is increasingly possible thatupon graduation you will join one of the many foreign firms in the UnitedStates or that you will be assigned to work in another country by a U.S., local,or third-country foreign firm. If you are considering employment with a foreignfirm, you may want to know whether the recruiting company tends to open itssenior-most ranks to other than its own nationals. If in doubt, look for foreignnames on the list of members of the board of directors, which provides a goodindication of how open the company is to nonnatives. Whether you work for adomestic or a foreign corporation, you not only will have to consider a foreignassignment but will spend time negotiating, entertaining, coaching, and learn-ing from foreign executives and employees. How well you perform these taskswill determine the rest of your career, as companies are increasingly on the look-out for individuals who can successfully operate globally.

1. Globalization is the accelerated interdependence of economic and businessactivities across national boundaries.

Chapter 1: International Business in an Age of Globalization 3

Interim Summary

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2. Globalization influences the availability and pricing of products and servicesaround the world while often blurring their source and identity.

3. Globalization affects your career opportunities and the skills you will need tobe successful.

Countries differ greatly in their globalizationlevels. Exhibit 1.1 ranks the 20 most global

countries according to their overall globalization level as well as according tothe four components that make up the Globalization Index developed by A. T.Kearney, a consultancy, and Foreign Policy magazine:2 economic integration,personal contact, technological connectivity, and political engagement.Economic integration scores are based on a country’s trade and foreign invest-ment, discussed later in Chapters 2 and 3 of this book. Technological connec-tivity scores are composed of the number of Internet users, hosts, and secureservers in a given nation. Personal contact scores are based on travel andtourism, international telephone traffic, and cross-border remittances. Finally,political engagement scores are a combination of membership in internationalorganizations, contributions of staff and money to UN peacekeeping missions,the number of international treaties ratified, and government-to-governmenttransfers.


THE FACE OF GLOBALIZATION

Exhibit 1.1 The Global Top 20 Countries

SOURCE: A. T. Kearney, “Globalization’s Last Hurrah?” Foreign Policy, Jan/Feb. 2002.

Singa

pore

Irelan

d

Switz

erlan

d

United

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Netherl

ands

Canad

a

Denmark

Swed

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Austri

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Finlan

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New Ze

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United

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Austra

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Norway

Czech R

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Croatia

Franc

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Malaysi

a

Slove

nia

Political

Technological

Personal

Economic

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Tech

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Exhibit 1.2 provides the complete 2005 globalization scores for a broadergroup of 62 countries that together account for 96% of the world’s GDP. Singaporeis in first place, having displaced Ireland, which was ranked first in prior years. TheUnited States advanced from seventh to fourth, its leadership in technologicalconnectivity counterbalanced by low rankings on the other three globalizationingredients, in particular economic integration (typical of countries with largedomestic markets). Indeed, one could argue that in a global environment, beinglarge is sometimes a liability in the sense that it allows firms to neglect interna-tional markets for too long. The study did not find a strong relation between glob-alization and the propensity to suffer terrorist attacks on one’s soil, discounting aspeculation that opening to the outside world invites security risks. However thestudy did find a relation between globalization and public education spending,especially in the developing world. In other words, success in a global, knowledge-based economy depends on having an educated workforce. Elsewhere, a New YorkTimes op-ed noted that countries that ranked high on the Globalization Index hadhigher economic and political stability (see Chapter 7), more flexible labor mar-kets, better regulation, and less corruption (see Chapter 19).3


1 Singapore 1 3 11 32 1 1 1 5 47 10 9 11 29 3 41 47

2 Ireland 2 2 13 19 4 2 3 3 6 24 18 7 12 11 28 22

3 Switzerland 9 1 7 29 18 5 2 4 1 11 14 5 29 13 41 10

4 United States 60 40 1 43 61 42 19 34 58 4 1 1 1 28 57 38

5 Netherlands 5 11 8 4 8 4 6 13 45 9 4 13 5 17 6 6

6 Canada 27 8 2 10 26 23 4 22 60 5 11 2 2 22 6 28

7 Denmark 29 7 5 13 19 38 7 17 17 3 3 8 12 14 28 7

8 Sweden 12 10 9 16 21 6 9 6 43 1 10 9 17 12 6 40

9 Austria 10 5 14 2 14 12 11 2 31 16 15 14 12 2 6 8

10 Finland 15 20 6 15 33 7 17 12 42 8 2 10 12 7 28 13

11 New Zealand 36 16 3 21 39 27 5 23 53 7 8 3 29 23 6 20

12 United Kingdom 32 12 10 5 45 20 10 16 37 12 17 6 5 10 6 18

13 Australia 37 34 4 25 55 16 14 30 50 6 5 4 29 5 28 36

14 Norway 35 15 12 17 29 34 12 24 30 22 6 12 17 20 6 24

15 Czech Republic 11 4 24 35 5 24 25 1 25 25 22 26 17 42 28 15

16 Croatia 7 6 28 26 12 8 20 7 9 31 34 25 29 49 1 16

17 Israel 19 9 16 46 24 14 8 27 11 18 16 17 48 15 61 4

18 France 24 17 21 3 46 10 15 14 39 20 19 20 2 6 6 9

19 Malaysia 4 19 27 49 2 21 27 10 16 21 37 35 29 43 41 45

20 Slovenia 17 13 20 23 11 339 22 8 23 15 25 18 29 21 6 25

21 Germany 43 29 17 8 30 54 16 21 49 14 21 16 2 9 28 11

Exhibit 1.2 Globalization Index Rankings

(Continued)

Econ

omic

2005

GI R

anki

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Pers

onal

Dimension Item

EconomicIntegration

Personal ContactTechnologicalConnectivity

Political Engagement

Polit

ical

Trad

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FDI

Tele

phon

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Trav

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Rem

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and

Pers

onal

Tra

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Inte

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Use

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Inte

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Secu

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rs

Inte

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22 Portugal 44 18 22 1 34 53 23 15 22 17 23 22 5 1 6 5

23 Hungary 6 32 26 22 6 15 34 9 36 28 20 29 17 35 1 30

24 Panama 3 47 34 34 9 3 33 37 40 46 41 23 48 56 1 26

25 Slovakia 8 38 30 7 3 37 30 33 21 26 26 34 29 4 1 53

26 Spain 22 28 23 11 42 11 24 18 29 29 24 19 5 25 6 14

27 Italy 47 27 25 6 50 40 18 20 44 23 33 24 5 18 6 12

28 Japan 62 58 15 18 62 52 40 45 61 13 12 15 29 8 6 49

29 Greece 55 23 32 9 48 58 21 11 38 33 29 27 5 24 28 3

30 South Korea 38 46 19 45 25 47 39 40 27 2 13 30 29 29 41 42

31 Poland 33 31 29 37 27 31 28 19 28 30 27 28 17 33 28 35

32 Philippines 28 14 49 42 16 55 41 51 2 49 48 47 17 51 28 41

33 Uganda 39 24 61 14 56 18 62 58 3 61 53 59 48 61 6 2

34 Chile 16 51 31 30 31 9 35 38 52 27 32 32 12 47 6 29

35 Romania 25 37 36 27 22 26 36 29 18 32 42 44 29 46 1 31

36 Taiwan 18 25 18 62 13 32 13 31 26 19 7 21 62 62 62 55

37 Tunisia 23 30 47 40 17 29 32 26 14 43 60 46 29 30 28 44

38 Botswana 30 39 51 12 20 41 31 25 33 51 46 50 48 57 6 1

39 Ukraine 13 41 45 41 10 41 42 32 19 44 43 49 48 37 28 21

40 Morocco 21 22 54 55 32 13 46 42 4 54 52 51 48 38 52 33

41 Senegal 40 36 55 24 35 44 48 47 12 55 58 56 29 26 6 17

42 Mexico 41 44 37 31 41 35 29 35 32 34 31 38 5 54 6 60

43 Sri Lanka 34 26 57 56 23 45 49 50 5 58 54 48 58 58 41 46

44 Nigeria 20 52 60 33 15 30 59 59 34 60 61 60 17 36 6 62

45 Saudi Arabia 45 21 46 57 28 62 26 28 8 45 47 45 48 45 52 54

46 Thailand 14 50 40 58 7 43 54 43 35 36 44 40 17 44 57 48

47 Argentina 58 56 33 20 53 49 47 44 55 35 28 37 17 16 6 39

48 South Africa 48 55 38 28 44 50 43 39 54 40 35 31 17 32 6 27

49 Kenya 52 42 58 38 43 56 61 55 13 57 50 57 48 27 28 32

50 Pakistan 53 33 59 52 54 36 53 62 7 59 55 55 48 31 52 19

51 Colombia 42 43 44 51 52 22 38 53 15 50 39 42 48 48 41 34

52 Russia 46 53 42 36 40 46 51 41 48 39 38 43 17 19 41 37

53 Peru 54 49 41 39 57 28 37 49 41 37 40 41 29 52 6 59

54 China 26 57 50 54 36 19 56 54 46 47 51 58 29 34 52 58

55 Venezuela 31 59 43 50 51 17 45 52 59 48 45 39 29 50 41 56

56 Turkey 49 54 39 47 38 57 44 36 56 41 36 36 29 41 41 43

57 Brazil 57 61 35 44 60 33 52 56 57 38 30 33 29 40 28 57

58 Bangladesh 61 35 62 53 58 61 60 60 10 62 62 62 58 39 41 50

59 Egypt 56 45 52 59 49 60 50 46 20 52 59 52 29 55 57 23

60 Indonesia 50 60 53 48 37 59 57 57 51 53 49 54 17 60 41 51

61 India 59 48 56 60 59 51 58 61 24 56 56 53 58 59 52 52

62 Iran 51 62 48 61 47 48 55 48 62 42 57 61 58 53 57 61

Exhibit 1.2 (Continued)

SOURCE: A. T. Kearney, “Measuring globalization,” Foreign Policy, May/June 2005, p.52.

Tech

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Econ

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Pers

onal

Dimension Item

EconomicIntegration

Personal ContactTechnologicalConnectivity

Political Engagement

Polit

ical

Trad

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FDI

Tele

phon

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Trav

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Rem

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Who Benefits From Globalization?

One of the main arguments against globalization is that it confers benefits onrich nations at the expense of poor countries. Before we discuss this argument,let us take a look at the relationship between development level and globaliza-tion. It is evident from Exhibit 1.2 that some developed nations, such as Japan,obtain only moderate globalization scores, while some developing and emergingeconomies, such as the Czech Republic and Malaysia, obtain respectable scores.Still, the overall relationship is quite clear: The fourteen nations that score high-est on globalization are all developed economies, while the bottom half of the listis occupied by developing and emerging economies. This does not mean thatglobalization brings no value to the developing world; on the contrary, integra-tion into the global economy may well pave the route to economic growth andprosperity, as the case of Ireland, once Europe’s economic laggard and now itsfastest growing economy, shows clearly. In contrast, countries that fail to inte-grate into the global economy face the prospect of falling further behind.

The good news as we begin the 21st century is that the share of developingcountries in world merchandise trade is rising to its highest level in more than 50years, and the trade growth of the 49 least developed countries (LDCs) exceedsthe global average. It is also important to realize that many of the manifestationsof globalization in wealthy nations end up helping poorer economies. Forinstance, when a Singaporean tourist is visiting Laos, he is in effect increasing theexport sales of Laos by purchasing such services as hotel stays and tours. Andwhile wages in factories in a developing country are low by developed nationstandards, employees of foreign affiliates in developing economies are paid, onaverage, far more than those employed by domestic firms. While some local firmsare unable to compete with large foreign corporations and exit the market, otherstake advantage of the learning opportunities associated with multinational pres-ence and upgrade their capabilities, thus positioning themselves to becomefuture global players. If large multinational firms seem an exclusive club whosemembers come from rich nations, they are now joined by multinationals fromdeveloping economies. In 2000, for the first time ever, multinational firms fromdeveloping nations made it into the ranks of the top 100 global multinationals,4

and new contenders, such as China-founded Lenovo, are growing rapidly.

The Impact of Globalization

A common lamentation against globalization is that it deprives nations of theirsovereignty. This will supposedly occur because of the growing power of inter-national institutions (see Chapter 8) such as the World Trade Organization(WTO) or the International Monetary Fund (IMF), whose officials are not electedby popular vote. Yet, while the WTO has assumed a conflict-resolution role thatwas previously the domain of bilateral negotiations, its resolutions are based onconsensus, meaning that the vote of the smallest nation counts as much as thatof the largest. Most important decisions regarding international trade are stillmade by governments, and trade relations are governed by bilateral agreementsnegotiated and monitored by sovereign governments. And while mega multina-tional corporations abound, small firms remain viable players that have a role inthe global economy. As you will see in Chapter 4, small firms in the UnitedStates and in many other countries have actually increased their share ofnational exports over the last decade.

Another complaint against globalization is that it comes at the expense ofthe environment. Environmentalists accuse firms of relocating their operations


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abroad solely to escape tough pollution rules in their home countries, an argu-ment often titled a “race to the bottom” in search of “the lowest commondenominator.” While there is no question that globalization increases pollutionlevels in rapidly industrializing economies such as Vietnam and China, risingliving standards in those nations, in particular the purchase of automobiles, areat least partially to blame. And although some firms shed their environmentalresponsibilities in their quest for larger profits, others adhere to strict codes ofenvironmental protection and make a positive contribution by introducing sophis-ticated environmental technologies in the developing world. For instance, DowChemical has been credited with environmental cleanup in Eastern Europe andthe former East Germany. Further, the reality is that for most firms, environmen-tal standards are only one of many criteria used in determining their investmentand location decisions, meaning that the concept of “race to the bottom” doesnot always apply. Still, globalization poses huge environmental challenges, andfirms and governments must maintain their vigilance. You will find further dis-cussion of foreign direct investment in Chapter 3.

Throughout this book we will take the position that globalization is a complexphenomenon whose repercussions are often less than crystal clear. Globalizationcarries both promises and threats, and it produces winners as well as losers.Whether you view globalization as a blessing or a curse will often depend on yourperspective and vantage point. For instance, while globalization is correlated withhigher overall economic growth, this will probably be of little consolation to anemployee who loses his job as a result of foreign competition. Keep in mind, how-ever, that globalization is not the only factor influencing job loss and wage levels.Research shows that it is technology rather than globalization that puts the bulkof downward pressure on the wages of unskilled labor.5 The challenge of globaliza-tion involves enhancing its benefits and mitigating its negative impact, maintain-ing a balance between the public and the individual interest.

Globalization can yield negatives at the national level as well. Global capi-tal flow makes less regulated emerging economies such as Mexico, Thailand, andArgentina vulnerable to volatilities of international capital movements and for-eign exchange markets and may contribute to a financial or currency crisis inthese countries. Globalization exposes national economies to the uncertaintiesof the global economy, and, ironically, the most open economies are also themost at risk of a global slowdown. When prices of commodities, especially rawmaterials and natural resources, are undervalued owing to market control orinfluence by transnational cartels or by barriers imposed by importing nations,developing countries that export these commodities to developed countries losemany of the economic gains that would otherwise accrue. While asking for mar-ket access into developing countries, some developed nations themselves erectnew barriers against developing-country imports, in particular farm productsthat are heavily subsidized in the European Union and, to a somewhat lesserextent, the United States.

To offer most of its benefits and mitigate some of the negatives, it helps to havea developed infrastructure for globalization. Globalization infrastructure is theinstitutional framework (e.g., multilateral agreements in trade, investment, and ser-vice) and market efficiency (e.g., efficiency of international capital markets or for-eign exchange markets) that support fair and transparent transactions of productsand services and streamline flows of commodities, capital, labor, knowledge, andinformation. As discussed in Chapter 8, international economic organizations suchas the IMF, the World Bank, and the WTO play a vital role in facilitating such flows,as do firms, governments, and regional blocs, among others.


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1. It is useful to develop a balanced view on globalization, recognizing its pos-itive and negative aspects, so as to focus attention on constructive solutionsto the negatives while leveraging opportunities created by the positives.

2. International economic organizations such as the International MonetaryFund, the World Bank, and the World Trade Organization provide the infra-structure necessary to facilitate globalization.

It is sometimes suggested that globalization meansthe advance of a homogeneous civilization anda uniform business system that would no longerrequire adjustment to different business environ-

ments. Nothing could be further from the truth. While globalization marches on,pressures to maintain national identity and solidarity are not subsiding. On thecontrary, the growing interaction between different systems makes people more,rather than less, aware of the differences among them, often leading them tosuspect foreign inputs as potentially threatening to their group identity.Unfortunately, the erroneous assumption regarding homogeneity might leadfirms to believe that their strategies, practices, and products or services have uni-versal applicability with no need to distinguish between domestic and interna-tional business. Instead, company executives should strive to learn the intricaciesof the foreign environments in which they operate, because this is the only wayto leverage their firms’ global reach and scale. Globalization and localization mayseem contradictory, but they are two sides of the same coin and are bound to liveside by side in the future.

Throughout this book, you will learn about this simultaneous existence ofglobal and local forces and their interaction in international business. The mate-rial will explore how to leverage the global resources of the multinational enter-prise yet compensate for its unfamiliarity with the foreign environments inwhich it operates; how to extract economies of scale by selling a product inmultiple locations while making product adjustments and adaptations to reflectdifferent tastes and selling methods; and how to maintain a globally unifiedcompensation system for employees while taking into account the vast differ-ences in practices, values, standards of living, and taxation across the globe.Please note that we use the terms country and nation in this book to denoteboundaries of economic and political units that are not necessarily sovereignstates, such as Hong Kong, which is part of China but is a separate entity for for-eign trade and investment purposes.

What Is International Business?

International business refers to business activities that involve the transferof resources, goods, services, knowledge, skills, or information across nationalboundaries. The resources that make up this flow are raw materials, capital, goods,services, and people. Goods may be semi-finished and finished assemblies andproducts. Services include accounting, legal counsel, banking, insurance, manage-ment consulting, trade service, education, health care, and tourism, among others.Knowledge and skills include technology and innovation, organizational andmanagerial skills, and intellectual property rights such as copyrights, trademarks,


Interim Summary

GLOBALIZATION ANDINTERNATIONAL BUSINESS

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and brand names. Information flows include databases and information networks,among others. The parties involved may be individuals (e.g., tourists and individ-ual investors buying foreign stocks or bonds), companies (private or public),company clusters (e.g., alliances), government bodies (e.g., central banks), andinternational institutions (e.g., the World Bank, the IMF). Of these, companies arethe dominant players. The firm is the primary economic agent facilitating andgaining (or suffering) from globalization. Firm activities and exchanges thatinvolve the crossing of national boundaries are called international transactions.International transactions are manifested mainly in international trade andinvestment. International trade occurs when a company exports goods or servicesto buyers (importers) in another country. International investment occurs whenthe company invests resources in business activities outside its home country.

Any firm, regardless of size, that is engaged in international business isdefined in this book as an international firm. A firm that has directly investedabroad and has at least one working affiliate in a foreign country (e.g., a factory,a branch office) over which it maintains effective control is defined in this bookas a multinational enterprise, or MNE. Please note that there are multiple defi-nitions of the MNE out there, most of which are rather arbitrary (for instance,one definition requires presence in at least six foreign locations; another that thefirm has a presence in all major regions—North America, Europe, and Asia). Forthe sake of clarity, however, we use the standard working definition noted above.

International companies are the beneficiaries of, as well as the reason for, thegrowing interdependence among nations. Motorola has development, design,manufacturing, and sales facilities in multiple countries and derives most of itsrevenues from foreign operations. Companies like Motorola can be listed andraise capital in financial markets around the world, including New York, London,Paris, Zurich, Singapore, Tokyo, and Hong Kong. Both large and small firms canbenefit from competitively priced labor, cheap resources, and enormous marketopportunities by shifting their production facilities to emerging economies suchas Vietnam, China, and India, while benefiting from the high skill level availablein places such as Ireland and Israel to do development and design work. LeviStrauss jeans and other apparel are made by subcontractors in Bangladesh, China,and other locations and are then sold in markets throughout the world. IBM andMicrosoft employ Indian software developers based in India and the UnitedStates, and both firms have development centers in Israel as well as in other for-eign nations. Among service providers, U.S. architectural firms design buildingsacross Asia, while U.S. airlines compete for passengers on international routeswith both foreign and third-party carriers. Such activities involve the movementof capital, people, knowledge, and products from one country to another. Theyare a consequence, as much as a generator, of globalization.

How can one measure the degree of globalization across various industries?One measure, which involves the industry’s international linkages, gauges theextent to which a particular activity is concentrated in one country (low globaliza-tion) or in many countries (high globalization). The other measure is the integra-tion of value-added activities—that is, whether most activities leading to a finalproduct or service are done in one versus many countries. Together, these two mea-sures tell us how global an industry is.6 Other ways to measure industry globaliza-tion, such as the “transnationalization index,” are mentioned in Chapters 2 and 3.

International Versus Domestic Business

Traditionally, international business has been the outgrowth of domestic busi-ness. In fact, most major corporations that are active in today’s international


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scene started their operations in the domestic market. Leading Japanese automak-ers such as Toyota and Honda started their operations in their domestic marketbefore beginning to export to other countries. As the magnitude of their opera-tions grew, they found it profitable or otherwise necessary to build plants andfacilities in other countries, most notably the United States. While many firmsstill follow the traditional route of domestic growth first, international expansionsecond, we increasingly see firms that target international markets when launch-ing their operations. These firms are called born global, global startups, or inter-national new ventures (INVs) and are discussed in Chapter 4 and especially inChapter 20. NASDAQ-traded Israeli firm Checkpoint, a leader in the softwaresecurity segment, is one such company. In addition, some companies engage ininternational activities without having a home base in the traditional sense. Anexample is the mainland operations of many Hong Kong investors whose “suit-case companies” do not have a presence in their home base.

Although international business is often an extension of domestic business,it is significantly different from the latter in environmental dynamicsand operational nature. Environmentally, the diversity that exists betweencountries with regard to cultures, social customs, business practices, laws, gov-ernment regulations, and political stability is among the many reasons for thecomplexity of international business. Therefore, international business is usu-ally riskier than domestic business, although, on the whole, presence in multi-ple international markets provides a measure of diversification, which mitigatesrisk. Variations in inflation, currency, taxation, and interest rates among differ-ent nations have a significant impact on the profitability of an internationalfirm. For a firm that is borrowing and investing in a foreign country, higherinterest rates, tax rates, and inflation rates mean higher cost of operation andlower profitability. At the same time, for a firm that is depositing money in a for-eign bank, higher interest rates mean a higher return. Similarly, when the eurogoes down in value against the U.S. dollar, U.S. exporters to the European Union(EU) will receive (unless hedging their currency exposure) fewer dollars for theireuro denominated transaction, while U.S. importers of EU goods will be able toeither lower the cost of the imports or increase their profitability.

The Coca-Cola Company, described in the opening case, needs not only tohedge its currency risk but also navigate financial environments with differentaccounting and tax systems. It also needs to attend to different cultures andsocial system, different regulations, and different consumption patterns, amongother factors. The competitive landscape can also be dramatically different inmarkets in which Coca-Cola is facing strong local competition (for example,from Wahaha in China), while in other markets the company must adjust fordifferent rules (for instance, a ban on comparative advertising). Competitioncan spring from nowhere: for example, Mecca Cola emerged in the Middle Eastpartially to take advantage of anti-American sentiment. The combined complex-ity entailed in operating in numerous markets that are different from each otherand the uncertainty involved in the potential for a sudden change in any ofthose environments defines the essence of international business. This complexlandscape creates opportunities (for instance, the opening of a new market suchas Vietnam) but also poses risks and uncertainties. Broadly, risk refers to unpre-dictability of operational and financial outcomes. Uncertainty refers to theunpredictability of environmental or organizational conditions that affect firmperformance. Uncertainty about environmental or organizational conditionsincreases the unpredictability of corporate performance and therefore increasesrisk. However, as earlier noticed, being in multiple markets also mitigates risk;for instance, in 2005 General Motors lost billions of dollars in North America,but its profits in China helped to somewhat narrow its overall loss.


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Operationally, international business tends to be more difficult and costlyto manage than business activities confined to a single country. Whatever ben-efits might be available from international operations, they will not be realizedif the firm cannot run a complex business effectively. Local employees andexpatriates (i.e., people who were sent to a foreign location from the homeheadquarters, as discussed in Chapter 17) may have trouble getting alongbecause of cultural, linguistic, and managerial style differences. The culturaldiversity encountered when operating in several countries may create problemsof communication, coordination, and motivation. Organizational principlesand managerial philosophies may differ widely, increasing the cost and diffi-culty of operation.

Why Do Firms Expand Internationally?

Generally speaking, the motivations for conducting international business includemarket motives, economic motives, and strategic motives. The motives vary

from one business activity to another,producing multiple motivations forthe international firm with a broadscope of activities in different parts ofthe globe.

Market motives can be offensiveor defensive. An offensive motiveis to seize market opportunities inforeign countries through trade orinvestment. Amway, Avon, and MaryKay all entered China in the early1990s in search of opportunities inthe country’s direct marketing busi-ness. Besides having the largest popu-lation and one of the fastest-growingeconomies in the world, China’sstrong culture of personal connec-tions and the pervasiveness of close-knit families and friends helpedmake the country the world’s biggestdirect-selling market. That the Chinesegovernment later outlawed direct

selling altogether exemplifies the inherent risk in doing business abroad,although the companies found ways to adjust (for instance, Mary Kay hasopened up customer “learning centers” as a substitute for direct door-to-doormarketing and sales) until the ban was lifted years later.

A defensive motive is to protect and hold a firm’s market power or compet-itive position in the face of threats from domestic rivalry or changes in govern-ment policies. Lenovo, now the world’s third largest maker of personal computers,entered international markets via acquiring IBM’s personal computers divisionpartially to defend from growing encroachment into its domestic market by Delland Hewlett Packard. Similarly, many North American and Asian companies inthe computer and electronics industries invested heavily in European countriesto bypass various barriers against imports from non–European Union members.Foreign automakers such as French conglomerate Peugeot-Citroën have estab-lished operations in China partially to offset inroads by their global competitorsinto this important market.


Photo 1.1 China has become a magnet for international expansion.

SOURCE: Jupiterimages.

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Economic motives apply when firms expand internationally to increasetheir return through higher revenues or lower costs. International trade andinvestment are vehicles enabling a firm to benefit from intercountry differencesin costs of labor, natural resources, and capital, as well as differences in regula-tory treatments, such as taxation. For example, more than 2,000 plants havesprung up near the U.S-Mexico border to take advantage of low-wage Mexicanlabor to assemble American-made components for reexport to the United States.Some of the investors later relocated their plants to still cheaper China,Vietnam, and India. Fossil, a leading producer of wristwatches, opted to locateits overseas manufacturing headquarters in East Asia rather than in its homecountry, the United States. Firms such as Motorola, Boeing, Microsoft, Alcatel-Lucent, Intel, Kodak, Otis, and Coca-Cola established production facilities inChina’s special economic zones or open coastal cities to attain a significantlylower taxation rate than that applicable in the United States.

Strategic motives lead firms to participate in international business whenthey seek, for instance, to capitalize on distinctive resources or capabilities devel-oped at home (e.g., technologies and economies of scale). By deploying theseresources or capabilities abroad or increasing production through internationaltrade, firms may be able to increase their cash inflows. Firms may also go inter-national to be the first mover in the target foreign market before a major com-petitor gets in, gaining strategic benefits such as technological leadership, brandrecognition, customer loyalty, and competitive position. Volkswagen was thesecond automaker to enter China and the first to locate in the all-importantShanghai market, gaining a virtual monopoly in that market for years. Addition-ally, firms may benefit from vertical integration involving different countries.For example, a company in the oil exploration and drilling business may inte-grate “downstream” by acquiring or building an oil refinery in a foreign countrythat has a market for its refined products. Conversely, a company that has strongdistribution channels (e.g., gas stations) in a country but needs a steady sourceof supply of gasoline at a predictable price may integrate “upstream” and acquirean oil producer and refiner in another country.

Yet another strategic motive is to follow the company’s major customersabroad (often termed “piggybacking”). Japanese tire maker Bridgestone founditself in the U.S. market when its customers—Japanese carmakers—exportedtheir cars, with Bridgestone tires mounted on them, to the United States, andtheir customers needed replacement tires. Other suppliers of Honda, Nissan, andToyota followed suit, many eventually locating manufacturing operations inthe United States. Bridgestone, for instance, took over U.S. tire manufacturerFirestone to become the world’s largest tire maker. Since responsiveness andproduct adaptation are becoming increasingly critical for business success, prox-imity to foreign customers is an important driver of overseas investment.

1. International business is the conducting of business activities that involvethe transfer of resources, goods, services, knowledge, skills, or informationacross national boundaries

2. International business is typically more complex and uncertain than domesticbusiness owing to differences in environments and operational requirements.

3. If an international business is not run effectively, the benefit of doingbusiness internationally may turn into a drawback because of the costs anddifficulties associated with managing activities in multiple locations.


Interim Summary

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This book is not about globalization perse but about conducting international

business in a global and rapidly changing world environment. The book willhelp you learn the basic concepts, principles, procedures, and practices in inter-national business and provide you with an understanding of the environmentsin which it is conducted and the institutions that oversee or otherwise play arole in international business activities. This should prepare you for a future inwhich you will effectively, responsibly, and ethically conduct international busi-ness, whether in your home country or in another.

The structure of this book is based on a vision of international business as aproactive managerial undertaking. Thus, the sequence consists of a descriptionof the major international activities and the players that pursue them, the envi-ronments in which they operate, the institutions governing their transactions,their strategies and design, the various functional areas that conduct specializedinternational business activities, and the issues that currently top the agenda ofinternational business practice and scholarship. A more detailed outline of thechapters follows.

Part 1 introduces three core topics in international business: internationaltrade in Chapter 2 (imports/exports), foreign direct investment in Chapter 3 (e.g.,establishing foreign subsidiaries), and the major players in international businessin Chapter 4 (the more traditional multinational enterprises hailing from devel-oping countries, the rising multinationals from developing economies, and thesmall- and medium-sized international companies).

Part 2 discusses the environment of international business. Understandingthe environment is essential if we are to understand the motivations and natureof home and host country firms as well as explain the features that draw orinhibit trade and investment in a host country. We start with country competi-tiveness (Chapter 5), a key determinant of trade, foreign investment, and theoperation and performance of the multinational firm; such competitiveness isalso a product of the endowments described in this part and the strategiesundertaken by nations, industries, and firms. We proceed with culture (Chapter6), a somewhat intangible yet crucial facet of international business that is toooften underestimated. We also discuss the political and legal environments thatestablish the ground rules within which international business operates(Chapter 7).

Part 3 focuses on global markets and institutions. It covers international eco-nomic integration and organizations (Chapter 8) and the international monetarysystem and financial markets (Chapter 9). These global institutions are key ele-ments of the infrastructure of globalization. They affect either regulatory frame-works or market efficiency for cross-border transactions. Global institutions arepart of the environments in which they operate, but they also participate in shap-ing the international business environment within which transactions take place.

Part 4 deals with international business strategies, the starting point for afirm’s operations in international markets. This part begins with a chapter oninternational entry strategies (Chapter 10), followed by a chapter on the organi-zation design of the multinational firm, explaining how this firm organizes itsoperations in order to execute its set strategy (Chapter 11). Chapter 12 focuseson building and managing global strategic alliances, an increasingly popular yetproblematic type of organization. Finally, Chapter 13 focuses on global researchand development (R&D), a progressively more crucial element in an increasinglyknowledge-based economy.

Part 5 deals with the separate international business functions. The aim is toillustrate the main challenges international business poses to each of the functional


THE STRUCTURE OF THIS BOOK

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business areas and the knowledge base necessary for effective performance in each ofthose areas. In this part, we include chapters on finance (e.g., raising capital; Chapter 14),accounting (e.g., transfer pricing issues; Chapter 15), marketing (e.g., advertising, pric-ing) and the supply chain (logistic issues such as distribution modes; Chapter 16), andhuman resource management (e.g., staffing subsidiaries; Chapter 17).

Part 6 highlights emerging issues in international business. One is globale-commerce (Chapter 18). After a much-hyped false start in the late 1990s,e-commerce has been growing rapidly. The nature of e-commerce challenges somekey ways of doing business internationally as well as the regulatory systems thatgovern them; it also exposes firms that hitherto have engaged only in domesticbusiness to the vagaries of international commerce. The second emerging topic,ethics and corruption (Chapter 19), has long been associated with internationalbusiness, especially in developing economies. In recent years, this once taboosubject has become the subject of much debate in developing and developed mar-kets alike. For instance, technological advances and increased globalization haveopened the door to piracy, counterfeiting, and similar phenomena on an unprece-dented scale. This assault on property rights can have a major influence on a firm’sglobal strategy and operational performance. The third emerging topic, and thelast chapter of this book (Chapter 20), deals with international entrepreneurship,a subject of great importance in an increasingly knowledge-based, innovationeconomy. The chapter covers both comparative (e.g., the motives of entrepreneur-ial activity in different countries) and international (e.g., European start-ups rais-ing money in the United States) aspects of entrepreneurship.

Pedagogical Thrust

While providing an in-depth discussion of individual topics as described above,the emphasis in this book is on the integration of topical areas. For instance,although culture is discussed in a separate chapter, its impact on environments,institutions, and firms is apparent throughout the book. Thus, when we discussaccounting, we note that certain features of accounting and auditing systemstend to correlate with cultural patterns, and when we discuss human resourcemanagement, we examine the role of cultural differences in expatriate adjust-ment. The manager’s challenge, after all, is about integration across functionsand regions, and this book reflects this responsibility. In addition to offeringtopical cross-references across chapters, we utilize special integration mecha-nisms—the country box and the industry box—in each chapter. The countrybox provides a zoom-in to a particular national market and the industry boxinto a particular sector. Readers should use these boxes not only to learn aboutthe country or industry being highlighted but also to ask, and attempt toanswer, what would have been different in another country or industry.

To sum up, this book is based on an appreciation for the diversity of busi-ness systems around the globe and a belief that awareness of the changing andintensifying nature of globalization and global competition should be high onthe agenda of the international manager. Whereas some observers see globaliza-tion as leading to a more homogeneous world, we view it as a continuallychanging mosaic whose diverse pieces come in more frequent contact with eachother, affecting each and every piece in a unique manner. The role of manage-ment is to monitor, understand, and respond to this changing environmentwith sensitivity and respect for the differences encountered, with a realizationthat international business decisions influence a great variety of constituenciesin multiple locations and, ultimately, the future and quality of life on the planet.This book is a reflection of this philosophy.


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1. Globalization enhances economic interdepen-dence but does not necessarily make nations moresimilar; it is a complex phenomenon that carriesboth negative and positive consequences and pro-duces winners and losers.

2. Globalization intensifies the ongoing tensionbetween forces for standardization and consolida-tion on the one hand, and those pushing for local-ization and adaptation on the other. This tensionrepresents one of the main challenges of doingbusiness internationally.

3. International business consists of businessactivities and resources transferred acrossnational boundaries. Firms that have directlyinvested in at least one foreign market areconsidered multinational enterprises (MNEs) inthis book.

4. International business is more complex andunpredictable than domestic business and oftenrequires different types and a different scale ofresources and capabilities.


INDUSTRY BOXWith 150 outfits turning out250,000 gravestones every year,Elberton, Georgia, produces more granite monumentsthan any other place in the United States. Twenty percentof the local inhabitants are engaged in the granite busi-ness, carving gravestones from local quarries and fromimported colored stone, unavailable locally. With the U.S.population aging and mortality rates on the rise, theindustry was expecting robust sales. Then, a new companyopened up in town. Unlike its local competitors, Sinostone,owned by China-based Wanli Stone Group, imported fin-ished gravestones from China, offering them at half thegoing price. Ten-year-old Wanli has already exported itsproducts to Japan and Europe and was now targetingthe U.S. market. It decided to locate in Elberton because ofthe number of buyers who come there every year and theready transportation to dealers across the United States.Assigned to oversee the new operation was Su Xian, aphysician and the wife of a Wanli co-owner.

The local business community was not sure how toreact. Some competitors spread the word that Sinostone’s

products were inferior and that thecolor on their gravestones would soon

fade, an accusation the Chinese company strongly denies.The Elberton Granite Association has organized a “buyAmerica” campaign from which Sinostone has beenexcluded. Others suggested to Mrs. Su that she shouldraise her prices. Still other competitors have traveled toTianjin to look at the Wanli site, which is dedicated to U.S.exports. They noted that the operation, located next doorto operations of Boeing and Motorola, was “ten yearsahead” compared with other Chinese competitors, someof whom were “thirty years behind” their U.S. counterparts.Sinostone’s U.S. competitors have now started to importfinished gravestones from China, more than triplingChina’s exports to the United States in this category inthree years.

SOURCE: Adapted from Neil King. “Grave reservations: Why Dr. Su’sarrival rocks Georgia town.” Wall Street Journal, July 23, 2002, A1; “Thelatest Chinese success story”, Fast Company, 79, February 2004;“Destroying a community”, Small, Local Community, 2005; Sinostoneweb site and publications, 2006.

CHAPTER SUMMARY

SSIINNOOSSTTOONNEE CCOOMMEESS TTOO EELLBBEERRTTOONN

CChhaapptteerr NNootteess

1. United States National Intelligence Council. Thecontradictions of globalization, 2005.

2. A. T. Kearney. “Measuring globalization.” ForeignPolicy. May/June 2005: pp. 52–60.

3. Richard W. Fisher and W. Michael Cox. “Globalizinggood government.” New York Times, April 10, 2006, A25.

4. United Nations Conference on Trade and Develop-ment (UNCTAD). World Investment Report, 2000.

5. W. R. Cline, Institute of InternationalEconomics. Cited in the Economist, September 29,2001: p. 9.

6. Mona V. Makhija, Kim Kwangsoo, and Sandra D.Williamson. “Measuring globalization of industries usinga national industry approach: Empirical evidence acrossfive countries and over time.” Journal of InternationalBusiness Studies, 1997, 28, 4: pp. 679–710.

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